Budgeting(2.2.4) Flashcards
(18 cards)
What is a budget?
a financial plan that shows hoe much money a business expects to spend over a certain period which helps a business to monitor and control its costs more effectively
The key purposes of budgeting
planning
communication
motivation
control and monitoring
efficiency
coordination
Control and monitoring-budgeting
a budget helps a business to control its expenses more effectively
by comparing actual costs against the budgeted costs a business can identify areas where it is overspending and take corrective action to control costs
Planning-budgeting
a budget helps a business plan for for the future by setting financial goals and objectives for cost reduction
it provides a roadmap for the business to follow outlining the expenses that need to be reduced to achieve those goals
Coordination-budgeting
a budget helps to coordinate cost control efforts across different departments in a business
by setting financial goals and allocating resources the budget ensures that everyone is working towards the same objectives
Communication-budgeting
a budget can be used to communicate financial expectations to stakeholders such as shareholders or lenders
it provides transparency and accountability demonstrating how the business plans to control its costs to improve its financial performance
Efficiency-budgeting
a budget helps a business allocate its financial resources more efficiently by identifying areas where costs can be reduced without affecting the quality of its products or services
Motivation-budgeting
a budget can also be used to motivate employees to work towards cost reduction goals
by setting cost reduction targets and incentivising employees to achieve them the budget can help create a sense of ownership and responsibility among employees which can improve their motivation and job satisfaction
What is historical figures budgeting?
a projection of the future based on historical data
Historical figures budgeting
useful when a business’ financial patterns are relatively stable and predictable making it easier to forecast future income and expenses
What is a zero based budget?
requires the business to justify every expense regardless of whether it was included in the previous budget or not
Zero based budget
assumes that the previous years expenses are not necessarily a good indicator of what is needed in the future
useful when a business is looking to reduce costs and eliminate unnecessary expenses
Budgeting process
business must prepare their budgets by setting financial targets and objectives for a specific period (e.g a year)
budget includes estimates of expected revenue expenses and other financial elements based on the business goals and market conditions
different departments or cost centres within the business contribute to the budget aligning their activities with the overall organisational objectives
as the business operates and progresses through the budgeted period it compares he actual financial results with the budgeted figures
actual results are tracked such as actual sales actual expenses incurred and actual profit or loss generated
this comparison allows the business to identify any any deviations or variances between the budgeted and actual figures
final key stage is to analyse the variance
What is a variance analysis?
a tool used by businesses to compare their actual finance results to their budgeted or expected results
Variance analysis
involves identifying and analysing the difference (or variance) between the actual results and the budgeted or expected results
two types: favourable and unfavourable
What is favourable variance?
occurs when the actual results are better for the business than the budgeted or expected results
What is unfavourable variance?
occurs when the actual results are worse for the business than the budgeted or expected results
Variance equation
variance = budgeted costs - actual costs
